A whippy, volatile week ended on a negative note, as stocks plunged across the board last Friday. The major indices opened nearly flat, but quickly settled into a steady intraday downtrend that persisted to the closing bell. The Dow Jones Industrial Average nosedived 1.4%, the S&P 500 1.7%, and the Nasdaq Composite 2.0%. Small-cap stocks took a beating, as the Russell 2000 tumbled 2.9%. The S&P Midcap 400 Index shed 2.0%. All the main stock market indexes closed at their dead lows of the day. On a weekly basis, the major indices also suffered their sharpest percentage declines since January.

Turnover was mixed. Total volume in the NYSE rose 11% above the previous day's level, while volume in the Nasdaq was 7% lighter. The higher volume loss in the S&P 500 caused the index to register its third "distribution day" in recent weeks, in addition to at least one session of bearish "churning" during the same period. In both exchanges, volume was firmly above 50-day average levels every day last week. It's negative that the increased trade coincided with the broad market's biggest decline in nearly four months, which indicated institutional selling into strength near the 52-week highs of the main stock market indexes.

Whether a bull or bear, one would surely agree last week was a dizzying session for traders. On April 27, the S&P 500 fell 2.3% and closed below short-term support of its 20-day exponential moving average (EMA). The following day, the index bounced moderately, but ran into new resistance of that 20-day EMA. On April 29, the broad market zoomed higher, powering the S&P 500 back above its 20-day EMA and erasing nearly all of its April 27 loss. The Nasdaq even managed to rally on higher volume. But the market got whacked again on April 30, causing stocks to finish the week just above their "swing lows" of April 27. So far, one might merely define recent price action as choppy. However, the annotated daily chart of the S&P 500 below leads us to believe the broad market will soon break out of its confused, short-term range -- albeit to the downside:



Just a quick glance at the chart above makes it tough to ignore the fact that big volume is coming into the market at the highs, a clear warning sign that the strong uptrend may soon reverse. Furthermore, the S&P 500 (as well as the Dow and Nasdaq) is back below its 20-day EMA, which will again act as short-term resistance going into today. Additional near-term resistance will now be found at the April 29 "swing highs." Conversely, last week's lows of the major indices, formed on April 27, are pivotal levels of near-term support. If those lows are broken, and stocks close below last week's lows, a near-term "lower high" and "lower low" will be formed on many industry sector and broad-based index charts. This, of course, would also represent a reversal of the broad market's short-term trend.

One of the few sectors that fared well last week was precious metals. Both the SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) rallied last week, and broke out above recent resistance levels. Since we prefer buying commodity ETFs on pullbacks to support, rather than breakouts above resistance, we passed on buying either ETF. Additionally, recent strength in the U.S. Dollar Bull Index (UUP) gave us cause for concern of buying the precious metals, although it now appears UUP may be forming a "double top" at its prior highs from two months ago. Of all the precious metals ETFs, perhaps the strongest is E-Tracs Platinum (PTM). On the daily chart below, notice the tight consolidation at the highs, as PTM shows relative strength by holding above its 20-day EMA. Short-term momentum traders might consider buying PTM on a breakout above the range, though a tight stop just below the breakout level should be considered:



Last week, lots of stop orders got triggered on long and short positions alike, making it challenging to stay with positions for more than a day or two. Fortunately, we closed all three of our open ETF positions (one long, one short, and one with low market correlation) on April 29. We say "fortunately" because the bullish action of April 29 could have easily tempted more aggressive traders into jumping back onto the long side of the market...just one day before stocks got crushed again on April 30. Instead, we simply sat on our hands, in capital preservation mode, while stocks fell apart last Friday. Going into this week, being fully in cash gives us the ability to quickly and easily take advantage of new opportunities as they develop, and without the risk of sitting through a choppy and volatile market.

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.